Pricing 102: how to get it right the first time.

When people want to know what their apartment or house is worth, they usually ask two or three brokers in to see it and give their professional opinions.

There are those who will call in a licensed appraiser, but this can be expensive ($500--$1000).

Appraisers are highly trained.  To get an appraiser’s license, you have to go to school for two years.

To get a real estate license, you have to go to school for two weekends.   (It takes more than that to get a broker’s license, but not much.)

So legally, brokers cannot offer anything more than a professional opinion.

But a seasoned broker’s knowledge of the market can be just as intimate as an appraiser’s, and possibly even more accurate.

Brokers have access to the same information as appraisers. Selling prices of condos, co-ops and houses are now all public information and are not that hard to find.

So for no charge at all, a broker can give you a highly informed opinion of your property’s value.  That is, if he does his homework.

Here’s how I do it.  The first thing I do is visit it, take a long look, and have a detailed conversation with the sellers about the financial state of the building, any major repairs that may be coming up, their reasons for selling and what their expectations are.

I never mention a price during this meeting.

Of course location is important.  But not as important as it once was.  My feeling has always been, if you want to know what the next hot, hip, edgy, highly sought-after, expensive, pick-your-effusive-adjective location is going to be, just think of the place where you wouldn't be caught dead. 

Soho?  Tribeca?  The meat-packing district?  Williamsburg?  I rest my case.

I consider the work that the property needs, if any. Does it need a new kitchen and/or bathrooms? A new floor? The cost of the work will have to be factored into the price, along with an allowance for the hassle of doing it. 

There are other factors.  How's the light?  What's the view?  Can you see a tree anywhere? 

Sometimes there’s still another issue, one that has to be handled delicately.

Properties that are what we politely call “taste-specific” are harder to sell than properties that will appeal to a broader market. 

The owners of one small apartment in a very traditional prewar building had hired a very famous designer and given her free rein.  The result was a lot of burlap and cement. 

It must have cost a fortune to put together.  It was interesting and certainly representative of the designer’s style, and I'm sure the owners loved it, but it had absolutely nothing to do with the style of the building. 

They couldn’t give it away.

I generally tell owners like these something like, “Just as you have done a lot of work to make this apartment a reflection of your personal taste, the next owner will want to make it a reflection of theirs. People don’t want to live in a space that feels like it belongs to somebody else.” 

Often people have unusual ideas about what makes their property desirable. I remember a newlywed couple who wanted an unrealistic price for their co-op.

I gently pointed out that it would probably be worth what they wanted for it if it had a view of the street instead of a brick wall.

They were actually surprised. They loved that brick wall. It gave them a real sense of privacy. It was part of why they bought the apartment.

After the meeting, I go back to my computer and put together three detailed spreadsheets, with links to pictures and floor plans for each listing.

One offers information on every comparable property that’s sold in the last six months—rooms, bedrooms, bathrooms, monthly charges, amenities, square footage and price per square foot if available.

This is hard, factual data, but unfortunately it’s a bit out of date. The contracts that established the prices for these properties were signed two or three months before the actual sale occurred. A market can change in that time.

So the second spreadsheet offers the same information about all the similar properties that are currently under contract.

The actual contract prices are not available at this point, and won’t be till after the sales close, but it's clear that the last asking price was the right one because it fetched a buyer. 

This information, while not as hard as that contained in the first spreadsheet, has the advantage of being more recent and more reflective of the current market.

The third spreadsheet offers information about the listings that are active. That’s the competition.

What do other brokers and sellers think properties like these are worth? How long have the properties been on the market at their current price?

This is the softest information as, unless the property has been sitting on the market for a while, we have no idea if the price is realistic. But this information is the most current.

Then I look at the current absorption rate for properties like the subject. How many are there of them?  How many will a buyer have to choose from, and what do we have to do to make ours the most attractive?

How long will it take to sell off the inventory that’s currently on the market? Is it a buyer’s market? A seller’s market? A balanced market?

All of these factors are considered carefully before I give the seller a price.  And the price is always accompanied by the information that led me to it.

 

Pricing 101: why you have to get it right the first time.

Even the smartest sellers are sometimes rather optimistic about what their homes are worth.

And they figure they might as well start high because they can always drop the price later if the place doesn’t sell.

Here’s the problem:

Whenever a new property comes on the market, there is a pool of buyers out there who have already seen everything available, have a good idea of where the market is, know exactly what they want, and are ready to buy.

These people are well informed. They’ve probably been all over Streeteasy checking sold prices of similar properties, and if they haven’t, their brokers have. If a sale isn’t made to one of these buyers, the seller has to wait as more buyers enter this pool.

But this new group of buyers will know that the property has been on the market for a while. They figure either something’s wrong with it or else the price is too high.

If nobody else has been willing to pay the price the seller wants, why should they?

When a knowledgeable buyer walks into an overpriced property—assuming he’s even willing to look at it—instead of noticing the good points, he’s noticing the flaws. And what’s going through his head is going to be something like, “They want $2,000,000 for THIS? Who are they kidding?”

Even if the apartment or house has everything he wants, he’s not even going to make an offer. The seller is obviously unrealistic, so why bother? The buyer knows that if the seller is serious, the price will come down.

But when it does, buyers will know its history. It’s like looking at a jacket on a sale rack. If it’s drastically reduced, maybe there’s a button missing. Maybe it’s going out of style.

Maybe this house has mold. Maybe this apartment has noisy neighbors, or the building’s financials are questionable, or there’s some other flaw that’s not immediately obvious.

If the price is dropped a second time, the effect is even worse. And the longer it stays on the market, the more shopworn it gets.

In a falling market, this is not just bad, it’s disastrous.

In the early ‘90s, when the market was more or less in free fall, many sellers made this mistake. I remember one listing in particular. It started out with an asking price of $1,250,000—about $250,000 over market.

After a few months, the price dropped to $1,200,000. But by that time, its market value was more like $950,000. After further drops, it finally sold for $850,000, or $150,000 less than it would have brought if it had been priced properly in the first place.

Too many times I’ve heard sellers say, “I just think somebody’s going to walk in here and fall in love just like we did.” Sure they are. No question. But nobody’s going to love it enough to pay more than it’s worth.

Underpricing is not such a great idea, either. For a while, brokers were purposely underpricing properties, getting numerous offers at the first open house and then asking the buyers for their “best and final” offer by a given time.

Bidding wars are not fun for anybody, especially the ones where the offers are over the asking price. It’s true that some bidding wars end happily with a quick sale, well-satisfied sellers and buyers who are glad that at least they got the property they wanted.

But far too often, the result is bad feelings all around and no signed contract.

The unfortunate result of many bidding wars is that in the heat of the moment, buyers bid over their heads. Or if they win, they worry that they’re paying too much. After all, nobody else wanted to pay that much. And in the cold gray light of dawn, they walk away before signing a contract.

And by that time, those others who made offers have moved on to other properties, and the seller and broker have to start all over again.

I made a more or less random and completely unofficial study of 109 co-ops in Manhattan that sold for more than $1,000,000 in the past six months, in order to see the differences between the last asking price and the price the property actually sold for.

Seventy six of them, or about two thirds, sold at prices within 5% of the asking price, either over or under. Twenty five of them, or about a quarter, sold at or above the ask.

Overall, both the average and the median differences were a minus 4%.

Clearly, the lion’s share of apartments that sell are the ones that are priced at or very close to their actual market value.

So how do you figure out what that is? Check this post: How to price

Want to buy an apartment? Well, too bad. There aren't any.

Or at best, very few.  According to a report prepared by Miller Samuel, arguably New York’s foremost appraisal firm,  there are (or were on January 1) exactly 4,749 apartments for sale in Manhattan. 

 

This is the smallest number Miller Samuel has seen in the twelve years they’ve been preparing the report.

And remember, the 4,749 number includes apartments with brick wall views, sky high maintenances, kitchens with avocado green appliances, or other fatal flaws.  So the supply of apartments that somebody might actually want is even lower. 

The dearth of inventory is at least partly due to the dearth of  funding for new construction and new conversions after the crash of 2008.   There was simply a lot less inventory coming on the market.

 

The absorption rate is calculated by dividing the number of sales over the last 12 months by 12 to get the average number of sales per month, and dividing that number into the current number of available properties. 

 

This gives you the number of months it will probably take to sell all the properties currently available.

An absorption rate of more than nine months means it’s a buyers’ market.  Six to nine months is a balanced market.  Less than six months is a sellers’ market.    

The current overall absorption rate, as per Miller Samuel, is a scant 5.5 months.

Does this mean prices are going up?

Sort of.  For condos, “Most price indicators showed year-over-year gains…..Average sales price and average price per square foot increased 5.4% and 0.5%.”   Average sales price for a condo in the fourth quarter was $1,867,516, while the average price per square foot was $1,301. 

Co-op prices also showed gains.  Average sales price for a co-op in the 4th quarter of 2012 was $1,190,430 for a year-over-year gain of 6.9%; average price per square foot was up 0.3% to $939.

 

(The average unit price for a co-op increased at a higher rate than the average price per square foot simply because larger co-ops--with more square feet--were sold in the 4th quarter of 2012 than in the same period in 2011.)

But because co-ops, with their lower prices, gained a substantial market share, overall price indicators were mixed.  Median sales price for all apartments slipped 2% to $837,500  and average sales price increased a mere 1.1%, to $1,461,473..

Note that the difference in co-op and condo prices does not necessarily mean that co-ops are less desirable per se. 

 

Because  a large part of the condo market is new conversion or new construction, and comes with a lot of bells and whistles that co-ops do not generally offer ranging from doormen to dog spas, prices for condos are generally higher.

Bottom line, if you need to buy, you don’t have a lot of choice.  But on the other hand, if you want to sell, assuming your apartment is properly priced and marketed, it should be snapped up quickly.

Here’s the link to the full report:  http://www.millersamuel.com/reports/elliman-report-manhattan-sales-4q-2012

 

What do you get for $100,000,000 in New York?

The penthouse on the 73^rd, 74^th and 75^th floors of CitySpire, 150 West 56^th Street, has been on the market last July for $100,000,000, but as I don’t have many customers (OK, no customers) in that price range, it didn’t come to my attention until I read  www.therealdeal.com  ’s article on “America’s Priciest Listings of 2012.” 
  

The listing is the highest priced in New York, but it only ranks fifth in the country, after three in Los Angeles priced at $150,000,000 each and one in Miami at $125,000,000.

Raphael DeNiro of Douglas Elliman's $100,000,000 listing. 

So what do you get for your $100,000,000?
 

About 8,000 interior square feet broken up into seventeen rooms (that’s what the listing says; I counted only fifteen on the floor plan).

That would be six bedrooms, a dressing room, a media room, formal dining room, kitchen, service hall, conference room and sitting room. 

The price includes a separate apartment with bedroom, bath and kitchenette on a lower floor for staff or extra guests. 

The apartment has three half baths on the public floor, four full baths on the bedroom floor, one bull bath in the staff/guest apartment and one full bath on the master bedroom floor (personally, for $100,000,000 I would expect his and hers bathrooms off the master bedroom, but hey, you can't have everything), plus about 3,000 square feet of outdoor space.

You also get a lot of stuff that makes for great brokerbabble (that’s what Curbed calls the descriptions brokers write of their listings)—columns, coffered ceilings, a Versailles patterned floor and a private internal elevator.

But the most important selling feature is the 360 degree airplane view.

At 8,000 interior square feet, the price works out to $12,500 per interior square foot.   If you count the 3,000 square feet of terrace at half the value of the interior sf, as appraisers often do, it’s a bargain at only $10,526.32 psf. 

So if you’ve got an extra $100,000,000 lying around the house, you might want to check this out:  http://www.elliman.com/new-york-city/150-west-56-street-unit-ph-manhattan-nmdgceo.  And if you like it, call Raphael.  I’m commenting on this strictly as a blogger, not a broker.